Consumption Paths under Prospect Utility in an Optimal Growth Model

Foellmi, Reto; Rosenblatt-Wisch, Rina; Schenk-Hoppé, Klaus Reiner (August 2010). Consumption Paths under Prospect Utility in an Optimal Growth Model (Discussion Papers 10-10). Bern: Department of Economics

Preview

Text dp1010.pdf - Published Version Available under License Creative Commons: Attribution (CC-BY). Download (178kB) | Preview

This paper studies the Cass-Koopmans-Ramsey model of optimal economic growth in the presence of loss aversion and habit formation. The representative agent’s preferences for consumption can be gradually varied between the standard constant intertemporal elasticity of
substitution (CIES) case and Kahneman and Tversky’s prospect utility. We find that the transitional dynamics of optimal consumption paths differ distinctly from the standard model, in particular consumption smoothing is more pronounced. We also show that prospect utility can cause the economy to remain in a steady state with low consumption and low capital.

Interest & Impact

Downloads

154 since deposited on 15 Oct 2020
36 in the past 12 months

Citations

5 Citations in Web of Science ®
6 Citations in Scopus

Search

in Google Scholar™

Services

Actions (login required)

Edit item

Actions (login required)

Edit item